Lockheed’s Stevens Says Budget Impasse Unnerves Business

Dec. 14 (Bloomberg) -- The head of Lockheed Martin Corp.
said the impasse on negotiations to avoid tax increases and
spending cuts is rattling nerves in the business community.

“Any strategic planner would be nervous if they were a 40-year business and couldn’t look forward 19 days,” Chairman and
Chief Executive Officer Robert Stevens said today at a Bloomberg
Government breakfast in Washington, referring to the time left
before about $600 billion in tax and budget changes start to
take effect.

Stevens, 61, who will step down as CEO next month, said he
was optimistic a deal may be reached in time to avert the so-called fiscal cliff because “people are talking,” an
improvement from a month ago.

“Our sense echoes the sense across the business
community” that “we’re really rooting for the people in the
Congress and the administration” to “come together and find a
resolution,” Stevens said in a separate interview with
Bloomberg Television’s Peter Cook for “Capitol Gains” airing
Dec. 16.

Stevens, who heads the world’s largest defense contractor,
said the company still has several months before it would have
to contemplate job cuts if automatic defense cuts of about $500
billion over a decade begin to take effect in January.

Layoffs “may not happen until April or after April”
because contracts won’t need to be adjusted before then, he said
in the interview with Bloomberg editors and reporters.

Lockheed Martin fell 1.1 percent to $88.96 at the close in
New York trading and has climbed 10 percent this year.

F-35’s Prospects

Contractors don’t yet know the extent to which cuts will
affect specific programs, such as Lockheed Martin’s F-35
fighter, the Pentagon’s costliest weapons system. The cuts would
apply to funds not already obligated.

“It would mean fewer airplanes,” Stevens said in the
television interview. “Fewer airplanes at this juncture in the
program means less manufacturing efficiency.”

As soon as today, the Pentagon and the Bethesda, Maryland-based company may sign the final contract for the fifth
production lot for 29 F-35s, valued at about $3.8 billion. While
about 75 percent of those funds are already obligated, the
contract would protect the entire batch of fighters from
automatic cuts.

‘Worst’ Relations

The final contract took almost a year to negotiate. In
September, Lieutenant General Christopher Bogdan, who is now
director of the Pentagon’s F-35 program, said relations with the
company had deteriorated to “the worst I’ve ever seen.”

“It should not take 10 or 11 or 12 months to negotiate a
contract with someone we’ve been doing business with for 11
years,” Bogdan said at the time.

Marillyn Hewson, the chief operating officer who will
become the company’s CEO next month, said “the reason why it
took longer is that there was a real need to understand the
cost, on both sides, from the government side, from Lockheed
Martin’s side.”

The lessons learned should help speed the process in
pending negotiations on the sixth lot of 36 F-35s, she said at
the breakfast. Hewson, 58, said she hoped agreement would be
reached on an initial “undefinitized” contract this month.
Those jets also would be sheltered from the automatic cuts.

The Pentagon estimates the total cost for development and
production of 2,443 F-35s will be $395.7 billion, a 70 percent
increase since the initial contract with Lockheed was signed in
2001.

Canadian Review

Citing the fighter’s rising costs, Canada’s government said
this week that it will weigh whether to buy less costly
alternatives to the 65 F-35s it had planned to purchase.

Stevens said today he didn’t “look at it as a blow to the
program.”

“We find across the array of our most sophisticated buyers
that they routinely examine their acquisition decisions,”
Stevens said in the television interview.

Pending defense-budget cuts are likely to increase
pressures for defense companies to consolidate, Stevens said.
The Pentagon opposes mergers among the biggest contractors.

“If you don’t have consolidation, you start to get some
pretty weak performers” as defense spending declines, he said
at the breakfast. “And we’re mostly worried about how that
affects the periphery or the edge of our supply chain.”

While Lockheed Martin won’t hesitate “if we see
acquisitions that look appealing,” Stevens said consolidation
isn’t always the answer.

“Remember, anything you buy, you’ve got to integrate,” he
said.

Lockheed Martin’s Chief Financial Officer Bruce Tanner said
last month that buying more companies would be his “first
preference” for using excess cash.

Stevens said today that Tanner’s comment was misinterpreted
as a signal that Lockheed was about to make “huge”
acquisitions.